Industry: Bad Precedent Set if DoD Cancels Multiyear Helo Buy

Apr. 14, 2014 - 02:24PM
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Savings Questioned: The US Navy plans to cancel the purchase of 29 MH-60R Seahawk helicopters in 2016, but the cancellation fees could total as much, or more, as the purchase itself. (MC3 Chris Cavagnaro/US Navy)

WASHINGTON — The US Navy, in its fiscal 2015 budget proposal, said it wants to cancel a planned buy of 29 MH-60R Seahawk helicopters in 2016.

The service’s reasoning is fairly simple: The Navy is considering retiring the aircraft carrier George Washington due to defense spending cuts. Retiring a carrier means one less carrier air wing — which includes MH-60Rs.

But a major hurdle lies in the helicopter cancellation: The Pentagon signed a multiyear procurement deal with Sikorsky Aircraft and Lockheed Martin — makers of the helicopter — for those 29 machines, meaning the costs associated with terminating the contract could end up being higher than the purchase price, according to Defense Department and industry officials.

The cancellation also could hurt the US Army, which is acquiring UH-60M Black Hawk and HH-60M medical evacuation helicopters through the same multiyear procurement deal.

The Pentagon signed the $8.5 billion deal with Sikorsky for at least 653 helicopters in June 2012. Deliveries run through 2017. The deal included options for 263 more helicopters.

Moreover, it could set a bad precedent that makes contractors wary of inking multiyear procurements, which have saved the Pentagon significant money in acquisition costs over the years.

“The biggest change I think — which is troublesome — is I think this would be the first multiyear in the history of the US government to be broken,” said Scott Starrett, vice president of government business development for Sikorsky.

The Pentagon has said it does not want to get rid of a carrier, but budget caps are forcing it to cut ships, aircraft, vehicles and troops.

At a March 12 House Armed Services Committee hearing, Adm. Jon Greenert, chief of naval operations, said the cost of terminating the MH-60R contract is about the same as continuing it and getting the aircraft.

Sen. Carl Levin, chairman of the Senate Armed Services Committee, said at a March 27 hearing that the cost of terminating the MH-60R multiyear deal is “at least $250 million.”

“[T]hat action would result in increased cost to the Army, as well,” he said.

The Pentagon has been using multiyear procurement arrangements for decades to buy Air Force fighter jets, Navy destroyers, Marine Corps aircraft and Army vehicles. Since 1990, DoD has inked nearly 90 multiyear procurement deals, according to the Congressional Research Service (CRS). Eight multiyear contracts over that period have been for Sikorsky H-60-model helicopters.

The estimated savings by using a multiyear versus annual contract is 5 percent to 15 percent, historically, according to CRS.

“The reasons multiyears exist is they provide great stability for the supply chain on the industrial side ... and it provides tremendous saving for the government,” Starrett said.

Further complicating matters is the Navy MH-60R multiyear deal includes Army Black Hawk helicopters. If the Navy cancels its Seahawk buy, at least 60 Army aircraft that are part of that deal would be voided.

“The Army Black Hawks and the Navy Seahawks are both under the same contract,” Starrett said. “If either party changes their volume enough within the bounds of the contract, it breaks it for everybody.”

That means the Army would need to renegotiate for those helicopters, likely at a higher price tag.

“I would expect there would be a price difference in the helicopters,” Starrett said.

Sikorsky is working on the terms of its next multiyear procurement plan with the Army for its next batch of Black Hawks, Starrett said.

International MH-60R purchases by Australia and Denmark will not be affected if the Navy terminates its multiyear buy, said George Barton, vice president of business development for Lockheed Martin ship and aviation systems. ■